The final major fuel is coal. Historically, coal has been the cheap-and-dirty fuel that was always around in sufficient supply to take up the slack when oil or gas was in short supply. Several years ago, the utilities took coal so much for granted, as they counted on increased nuclear generating capacity (which did not materialize), that they neglected to make long-term commitments to assure a sufficient reserve of coal. Meanwhile, Japan's booming economy resulted in a huge demand (and consequently a high willingness to pay) for coal, which Japanese firms secured via long-term contracts with U.S. producers. As a result, all across the U.S., coal stockpiles are dwindling. The TVA, which normally maintains a 75 to 90-day stockpile, was down to 25 days last winter and 11 days worth this winter. Many utilities and other firms are fearful of having to shut down completely for lack of coal.
Actually, the coal shortage would be nowhere near as severe were it not for the Interstate Commerce Commission. For in fact, as with natural gas, there is actually enough coal to go around, if only it could be delivered to the users fast enough. Nearly all coal is shipped by rail in hopper cars. Years ago the railroads worked out extensive contractual agreements allowing interchange of cars between railroads; it is so much more convenient for railroads to accept and transport loaded cars from connecting railroads (rather than transferring the load to one of their own cars) that they are willing to pay a daily charge to the owning railroad for each day's use of its cars. The value of this privilege fluctuates over time, depending on the demand for freight cars in a particular region; however, the ICC, in order to prevent "profiteering", fixes the price - called the demurrage charge - and seldom changes it.
For the past several years the demurrage charge has been far below the market level for hopper cars, and as a result, severe shortage of hoppers have developed in parts of the country. Railroads near ports serving the export market gladly paid the low price for hanging onto a large supply of other roads' cars - and their owners were powerless to change things. Only in October 1970 did the ICC finally wake up to the reality of the coal shortage - at which point it abruptly doubled the demurrage charge. (So much for the chaotic free market vs. orderly government control.)
Thus, in the case of every major fuel the picture is much the same; apparent shortages exist primarily because of government interference in the market. In the face of such evidence, the response of politicians and statist lobbyists can be seen for the power-seeking demagoguery that it really is Senator Philip Hart recently asked the Federal Trade Commission to investigate the gas producers' request for higher prices, charging that producers are "withholding" gas supplies! Of course they are, as the preceding analysis has pointed out— the producers exist to make a profit, not to sacrifice themselves by producing at below-market rates. The American Public Power Association - a lobby group representing 1400 government-owned utilities - has called for price controls, rationing, an embargo on exports, and antitrust action against fuel producers all in the name of solving the problem brought about by such interventions. Some people just do not learn!
The actual solution should be clear from the foregoing analysis. The market mechanism must be allowed to regain control of fuel pricing; otherwise, the shortages of the last few years will continue to intensify, especially if shortsighted cures such as rationing and price-controls are enacted. But beyond the fuel market, what might be said of the utilities, whose incredible lack of planning and foresight has certainly contributed its share to the present crisis?
The sad fact is that the electric utilities constitute one of those uniquely American hybrids: franchised private enterprise (which translates as monopoly, pure and simple). Conventional wisdom holds that utilities are natural monopolies, and that for this reason they should be either government-owned or government-regulated. Yet this contention is a gross oversimplification, as a number of economists have recently pointed out. As Stigler and Friedland put it in the Journal of Law and Economics in October 1962, "the individual utility system is not possessed of any large amount of long nun monopoly power. It faces the competition of other energy sources in a large proportion of its product's uses, and it faces the competition of other utility systems, to which in the long run its industrial (and hence many of its domestic) users may move."
The first of these points can be illustrated by the growth of total energy systems in shopping centers, schools, and apartment buildings. In such systems, natural gas or kerosene is used to power a gas turbine generator which produces the building's electricity on-site; the exhaust heat is recycled and used to provide heating or air conditioning, depending on the season of the year. Such systems are directly competitive with commercial electric power in many parts of the country. Competition between two electric utility systems (the second point above) is quite conceivable, much as there used to be between telephone companies before government franchises became the rule. Manis has described such a case, as follows:
"Companies may send representatives to selected adjacent areas served by competitors. if they could offer better service and/or prices, they could get residents to sign contracts agreeing to take their service for a period of time at stipulated prices if the company builds into the area and offers the service. They can go to the existing company and indicate that they have the contracts and intend to provide service. It will then pay the existing firm to sell their equipment in the area and make something on it, rather than have it become completely useless. This could also be done by individuals without an existing company."
Thus, it is perfectly feasible to have competition in providing electricity or any other utility service, thereby making regulatory rate-setting commissions unnecessary. Those who argue for government regulation of utilities are quick to conjure up straw-man pictures of evil capitalists, but slow to admit the hidden costs of the monopolies such regulation fosters. An article in Fortune recently described the electric utility industry as "clumsy" and "sluggish" and stated categorically that "utility executives are generally unimaginative men, grown complacent on private monopoly and regulated profits."10 Despite being the biggest industry in the U.S., with assets of over $75 billion, and net income of over $3 billion, the electric power industry spends less than one quarter of one percent on research and development. Small wonder, then, that it failed to forecast the current demand for service, the technical problems of nuclear power development, the current fuel shortages, and the growing concern over pollution.
When profits are not guaranteed by public regulatory commissions, but must be earned by good service, companies have a large incentive to forecast correctly, to innovate, and to invest in R & D. Similarly, when the fuel market is unrestricted by coercive price controls and import-export restrictions, the free operation of the price system provides vital feedback on the state of the market for energy sources - allowing long-term decisions to be made accurately. The dead hand of regulation is a death-grip for any industry, and the sooner the fuel and electric power industries shake it off, the better off (and warmer) we'll all be.
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